Explaining Ben Bernanke’s QE2

Nov 4, 2010

Quantitative Easing. What the Fed announced yesterday at 2:15, didn’t get a whole lot of attention. The stock market is going through the roof because of it. What is it? Quantitative Easing is where a country’s central bank, i.e., the Federal Reserve, tries to boost the economy by increasing lending by increasing the money supply. How do they do that? Well, the Federal Reserve announced they’re gonna purchase about $600 billion in Treasury securities. That’s about $75 billion per month for the next eight months. This is the government printing new money to purchase existing Treasury securities that have already been issued and are currently owned. All right, so who owns them? Well, banks, Wall Street firms, insurance companies, pension funds, other governments. The purpose of the program, the purpose of QE2 is to reflate the economy, to create wealth via higher stock and bond prices, via inflation. It’s another stimulus. They tried it once before. That’s why it is QE2, Quantitative Easing 2.

In addition to the $600 billion, the Federal Reserve will also purchase $250 billion of Treasury securities with TARP money. Remember that TARP money? We had to bail out that $700 billion. If we didn’t, the world financial system would cash in 24 hours. We still have $250 billion of that unspent. So that $250 billion to purchase Treasury securities with TARP money again over the next few months. The total package will be $100 billion a month over the next eight months. The Federal Reserve is not buying the stocks. The institutions will have more money as a result of selling the Treasuries to the Fed and they use the money to buy securities and thus higher prices and this creates the impression of the economy’s growing, Wall Street, Dow Jones Industrial Average climbing every day, wow, look, we got an economy recovery. The purpose of the program is to put more cash, liquidity, into the system. Banks, Wall Street firms, insurance and pension funds, money firms who own them get the cash. The goal is the banks and other lending institutions will also lend the money to business and consumers to expand their business.

They did this once and it didn’t work and the small business people tell you this is not what we need. We don’t have a credit problem. We don’t have any customers. Our problem is there aren’t any customers. Our problem is we don’t have any sales and we don’t have any sales because there aren’t enough people working. More and more people are losing their jobs. Unemployment claims ‘unexpectedly’ went up again. Unexpectedly. Past stimulus plans from Obama’s to Quantitative Easing 1 have not helped the economy. They have not created sufficient job or economic growth. They have failed. Excessive printing of money and spending has hurt the value of the US dollar. The value of the dollar is down over 15% since Ben Bernanke began talking about QE2 back in August.

Now, the past stimulus money, previous, went to commercial banks, investment banks, Wall Street firms who have not lent the money, which we predicted. We predicted when TARP came they’re not going to lend the money, they’re not gonna redistribute, they’re going to shore up their own accounts, they’re gonna shore up their own bottom line, they’re gonna keep it, which they did. They have not lent the money to business and consumers as planned. The money has not been used to spend on new projects or on hiring people or creating growth. I mean interest rates are practically zero. They’re getting money for nothing. I mean it’s almost as though they’re being given money. That’s how low interest rates are for these transactions. And they have used this zero-cost money to buy and trade Treasury securities or other financial instruments and made money on the differential. It doesn’t cost them anything to get money, they invest it, they get a big return on it. Why would they lend it? Why would they put it out there at risk to somebody who may not be able to pay it back when they can invest it and shore up their own bottom lines, which is what’s happened. The money is being printed, it is being invested to banks and firms and Wall Street firms and it’s stopping with them. It’s not circulating.

It didn’t work in QE1, so damn it, you know, let’s try it again, QE2. What’s the definition of insanity? Doing the same thing over and over and expecting a different result. So the banks and all the people who are getting the newly printed money are using it to make more money, maintain a strong balance sheet during troubled Financial Times, make themselves look solid. Now, in the past, with Obama and the Democrats controlling the presidency and the House and the Senate, things were far too uncertain politically and economically. It’s another reason why all these firms have all this cash. You’ve heard the number, trillions of dollars in cash, firms are sitting on it. Democrats are running around, ‘Why don’t they invest it? These are selfish people.’ No, the objective is not to lose it. And they don’t know, speaking of taxes and freedom and loss of liberty, they don’t know how much of it Obama’s gonna come and claim. They don’t know how much Obama is going to cost them. But they got a good idea, it’s gonna be a lot.

So they’re holding it in reserve to be able to either pay it or to finagle a way around it. They’re willing to be criticized for this, too. Ask yourself, what’s a big number to you? Let’s say you had a hundred thousand dollars, and everybody was expecting you to take that hundred thousand dollars and spend it on something. But you weren’t sure what the future held and you’ve got your family to be concerned about and yourself, and you think down the road the federal government might have policies that are gonna make that hundred thousand dollars worth 40 or 50. Well, you’re gonna hold onto it, shelter it as best you can trying to keep it away from those guys as long as possible, ’cause it’s yours, you’ve earned it, or in some cases the Fed has given it to you, but regardless, you don’t want to give it to Obama. It’s not his.

In addition to all that, the USA world economy has been coming out of a financial crash, this thing in 2008, 2009. The institutions were very hesitant to lend the money back then so credit became and is still hard to get for a lot of businesses and people. And many of the companies and people whom the money was meant to be lent to were too hesitant to borrow it for the same reason. And these are the people who are saying we don’t need easier access to credit. We need customers. We need sales. So I mean you can lead a horse to water, but you can’t make the horse drink, so there was no average American or corporate beneficiary of any of this. Now with QE2 they want to attempt the same thing as they tried in the past, much of the previous stimulus money still out there. And, despite what you’ve heard, a lot of it — well, I’m sure some of it’s now been spent in this election cycle, but up until this election cycle, campaign cycle, a lot of the stimulus had not been spent; it had been held in reserve. And a lot of people think because of that there’s already enough money out there. There was $250 billion unspent TARP money. Why are they printing more? It’s a mistake. There should be sufficient money to achieve the goal of reflating the economy without printing the money, but they don’t think there is.

So the number of trillions that corporations are now sitting on in cash is $2 trillion. It is estimated that consumers are sitting on a combined $8 trillion in cash saving money, hedging their bets against the future not knowing but having a very great fear of what the future holds. US corporations have over a trillion dollars sitting in offshore accounts that benefit other countries and not the USA. We talked about this last week about double taxation. If Obama and US Congress would simply change tax rules some of that money being held offshore would be brought home and that would begin circulating in our economy. Now that the Democrats have lost the House, the Obama presidency and the Democrat controlled Senate can no longer do whatever they want. The Republicans have now created a check and balance, and this is going to lead to gridlock, which the markets absolutely love. One of the reasons the market is skyrocketing is because they can anticipate the gridlock that’s coming. They love it, because that’s not uncertainty. The uncertainty that has plagued the country and its companies for two years, uncertainty and fear now for the most part can be eradicated.

So the notion of gridlock — which Mort Kondracke is very afraid of — the notion of gridlock creates a more confidence business and consumer environment, which results in an expanding economy utilizing the increasing liquidity that has been injected by the Fed. So it has some potential, because of this money firms that have been holding the cash, been too hesitant to spend it or lend it, can see some credit ease, maybe, and we don’t need the QE2 to do this. We don’t need to start printing money. This is simply unnecessary, totally unnecessary. Money firms that have been holding the cash have been too hesitant to spend it or lend it, feeling we can see credit ease up, borrowers wanting to borrow, companies and small business, individuals feel better and safer, more confident to spend the cash, we’ll see if it happens. It’s still largely gonna depend on what President Obama’s policies are, what happens. Robert Fibbs floated the idea this afternoon they’re now open, they say, to extending the Bush tax cuts to everybody. We’ll see. So that’s what QE2 is. It’s an attempt to stimulate the economy in identical ways that have failed up ’til now.

The problem is if this doesn’t work. If it doesn’t work, and if these banks just sit on the cash, again, if the institutions just sit on the cash, hello inflation. And a lot of people are saying that’s good because that will show growth. One of the fastest ways to retire debt is to inflate the currency because you’re automatically gonna retire some of it just by virtue of the inflation. So if the economy doesn’t take off, the Fed’s not gotta be able to sell these bonds that it bought. Remember, the Fed’s buying all these Treasury bonds. The dollar will be devalued and we’ll have inflation, maybe even hyperinflation if this doesn’t work. That’s why people are really leery of it, that’s why it’s so damned risky and a lot of people are scratching their heads, ‘Why are we doing this, it isn’t necessary.’

BREAK TRANSCRIPT

RUSH: Now, to put this in perspective, during QE1 (Quantitative Easing 1, that was December 2008 through March of this year) the Fed bought $1.7 trillion of Treasury notes and mortgage-backed securities. So if $1.7 trillion didn’t do the trick, why will another $600 to $800 billion help? Even the New York Times is afraid of this. I don’t like quoting them, but they’re not even on board with this.